BANDOW/Forget the cliff, cut spending

As Washington struggles to avoid the "fiscal cliff," the near-term budget problem pales compared with the longer-term challenge.

The national debt is $16.3 trillion. Include all current unfunded federal liabilities, and the number is $222 trillion, according to economist Laurence Kotlikoff.

Republicans talk a lot about fiscal responsibility, but have been no less irresponsible than Democrats. For instance, President George W. Bush raised spending in virtually every area.

Still, many Republicans now seem to recognize that something must be done about entitlements. Not so for most Democrats and their special interest allies.

The Congressional Budget Office recently published "An Update to the Budget and Economic Outlook: Fiscal Years 2012 and 2022." For the fourth straight year the annual deficit exceeded $1 trillion. Moreover, "[f]ederal debt held by the public will reach 73 percent of GDP by the end of this fiscal year - the highest level since 1950 and about twice the 36 percent of GDP that it measured at the end of 2007."

"Spending on everything must be reduced, or debt will overwhelm us."

Under the CBO's most favorable estimate over the next decade Uncle Sam would pile up another $2.3 trillion worth of debt. At least the deficit would fall until 2018, and then start climbing again - for years.

The near-term deficit slowdown does not reflect increased spending responsibility. Explained CBO: "Most of the projected decline in the deficit occurs because revenues are set to rise considerably in the coming years under current law."

Projected spending cuts actually are unlikely to occur. For instance, last year Congress targeted so-called discretionary spending. However, this is a relatively small category of federal outlays - governed by annual appropriations rather than statutory eligibility - and legislators capped future expenditures rather than cut specific outlays. A future Congress could undo the change by simply appropriating more money.

Under the CBO's more likely "alternative fiscal scenario," the near-term budget looks frightening. The 2013 deficit would run another trillion dollars. The added 10-year total would be nearly $10 trillion. However, "Debt held by the public would climb to 90 percent of GDP by 2022 - higher than at any time since shortly after World War II."

Even this estimate is unduly positive. More bailouts are in the works for everything from the Postal Service to the Federal Housing Administration. There could be one or more recessions. Moreover, both higher tax rates and higher deficits would threaten the economy. Explained CBO: "[L]arger budget deficits and growing federal debt would hamper national saving and investment and thus reduce output and income."

The financial horror facing America is evident in another recent CBO study, "The 2012 Long-Term Budget Outlook." Worst is the coming explosion of entitlement spending. Explained CBO: "The aging of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security and Medicare, as well as long-term-care services financed by Medicaid."

All federal programs, minus net interest payments, have averaged 18.5 percent of GDP over the past 40 years. But now, warned the agency: "spending on the major health programs and Social Security [will] grow from more than 10 percent of the GDP today to almost 16 percent of GDP 25 years from now." In addition, "Debt, as a share of GDP, would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037."

Moreover, the foregoing estimates don't account for the "economic damage" likely from Uncle Sam's spendthrift policies. Explained CBO, the skyrocketing debt "would reduce national saving, leading to higher interests rates, more borrowing from abroad, and less domestic investment - which, in turn, would lower the growth of income." The agency figured that total GDP would be 4 percent lower in 2027 and around 13 percent lower in 2037.

Higher debt also would inflate interest payments. Under the alternative scenario interest costs would hit almost 10 percent of GDP by 2037. Finally, "Growing debt also would increase the probability of a sudden fiscal crisis," likely resulting in new bailouts, higher interest payments and even more debt.

Washington's nightmare budget future is driven by excessive spending, not inadequate taxing. The alternative scenario presumes revenue at 18.5 percent of GDP, roughly the past 40-year-average. In contrast, in 2037 "total spending would be 36 percent of GDP," about 10 percent higher than under the baseline scenario and 14 percent higher than the average over the past 40 years.

Federal spending must come down. Uncle Sam must live within his means. That means cutting everything: foreign aid, pork, grants, loans, and loan guarantees, military outlays and entitlements.

Politicians don't need more money. They need to spend less and more wisely. That is the only answer to the America's short- and long-term budget crises.